Auto Finance 101
The first thing you are going to want to do is check your credit score. You can use an app like Credit Karma or you can request your credit report from any of the agencies. Equifax and Transunion are used most common. When you get that you are going to want to look at a few things and no the score is not the first thing. Even when you look at those two reports, they could have the exact same things on them but be different scores. You want to see what you are missing. Do you have something in collections that you had no idea about? Do you have judgements or bankruptcies? Once you figure out those things you are going to be able to see what the bank sees. If you wouldn't give a loan to a friend with the things that are on your credit report, why would the bank want to or not want to.
Next thing you want to look at is what your payments are going out, but only the things on your credit report. Mortgage payment, credit cards, and other loans. Add up those payments and figure out your Debt To Income ratio. The bank is not going to want to give you a loan that you cannot afford.
Now back to those collections. Before you pay them off. Call the collection agency. Ask them if they will remove it from your credit report if you pay in full today. If they say yes, then do it immediately (only if you can afford it of course). If they say no, still pay it off but maybe with a check and a letter requesting it again. Sometimes you may get someone that is willing to do it. Don't give them your sob story on why it wasn't paid, they don't really care and they have heard every excuse in the book. Just like when you get pulled over for speeding, they know your speedometer is not broken.
It is easier to get a loan when the bank sees that you are willing to pay off your debts. Once you have all of those taken care of then you are one step closer.
What can you afford?
- Auto loan calculator - Bankrate.com
Make sure you can afford the vehicle you are applying for. Use a calculator like this to verify. Remember you are financing the vehicle and all applicable taxes and fees. The dealership should know what those would be, so ask!
Save up a down payment
Sometimes the dealership is going to have an onsite funding department. Make sure they have your best interests in mind and not just the vehicle sale. The company I work for is in a dealership but we are a separate business, so we have you in mind not just the vehicle sale.
Depending on what your credit looks like you may or may not qualify for the vehicle you are looking for. The other thing to look at is the value of the vehicle as well as the age and miles. If you have poor credit you should already know to look for a vehicle that is 9 years old or newer and under 100,000 miles. That is because the value of the vehicle is going to give the bank the best return if you default on the loan. They are going to be able to sell it and get some of their money back. You should also be ready for a much higher interest rate. You may hear the radio ads that talk about 4 - 10% interest, that is for those with VERY GOOD credit scores (650+ with no collections). If you want a lower interest rate you are going to need a good cosigner (700+ score with no open autos and good income is your best option). You may also require one if you want the loan at all. Always have one in mind just in case. (Also keep in mind that does not guarantee you the interest rate that they would qualify for on their own).
Sometimes the dealership is going to be able to get you qualified on only one vehicle. You can take it and run with it and enjoy that you are increasing your score or you can go without and try to find another dealership or bank that will finance you. Be careful with the Buy Here Pay Here. Do you research. Our establishments do not do them for a reason.
In some instances the dealership can beat the interest at your regular bank, if you have good credit. In others they have access to banks that you wouldn't normally qualify at or have access too (or even know existed). In other instances your bank may be able to give you a loan when the dealerships banks will not.
The other great reason to check with the dealership is if they know they cannot get you financed on the vehicle without a certain amount down and you may not quite have that much down they may be able to work with you. Not on every occasion but if you are lucky, the banks will never give you that option.
When you get your credit pulled whether it is at the dealership or your bank it is a hard pull so make sure you know what is on there and what you are looking to do. Be specific. If you are going through the bank you will only have it pulled once. If you are going through the dealership remember that they are going to pull it and each of the banks they send it to are going to pull it. If you have credit that is right on the edge make sure you research the dealership and the car before you apply for a loan so that you don't have unnecessary pulls on your credit report.
Those small things may mean the difference between getting the vehicle you want or getting declined. If you know you have credit that is right on the edge make sure that you tell them you only want it sent to a couple of banks. They should know where their best option is by looking at your credit score.